A commonly held belief is that if you pay $500,000 for a city investment property, you should be able to get $500 per week rent, which translates to a 5% yield.
It’s a useful rule of thumb but not always reliable. For instance, vacancy rates and capital growth rates are not necessarily linked, so one can often lag behind the other.
There are other factors that can affect your return on investment, such as apartment strata levies, which are extremely variable from one building to the next. Or whether you can claim depreciation on all or part of the building and/or fixtures.
Then there is the standard of the kitchen and bathroom/s, which are key areas that can have an impact on the rent that tenants are prepared to pay. This is where we see some great opportunities for adding immediate capital value to a property and improving the rental yield.
For example, we recently helped some clients buy an apartment for $581,000 with an expected weekly rental of $520, which translates to a yield of 4.65%. The apartment block has a large shared laundry, which is not ideal. And the kitchen in this property is pretty tired, without a dishwasher and has space to incorporate a laundry. By spending $10000 on a new kitchen the expected rental would be $560 per week. This gives a yield on the renovation expense of 20.8%! And no stamp duty would be paid on that portion of the investment. Overall, as well as increasing the property’s value to something around $610,000, our clients would be improving their yield for the first year of ownership to a much healthier 4.9%.
But it is important to do your research. You must have a good handle on property values and accurate rental estimates in order to pull this off.
Published:- 11 February 2011
Please note: Good Deeds buyers tips are intended to be of a general nature. Please contact us for advice that is specific to your individual circumstances. You may also need to get advice from other professionals such as an accountant, mortgage broker, financial planner or solicitor.